You know I liked a book when I get two blog posts out of it, so here are some more thoughts on The Undoing Project by Michael Lewis:

Kahneman and Tversky covered a lot of ground, and one of their areas of study was heuristics, which are mental shortcuts. Often heuristics are very helpful like when you’re driving a car: your brain reacts to road and car based off experience that frees up the rest of your mind to think about other things.

However, every shortcut excludes something, which leaves room for error. Kahneman and Tversky explored an idea they called “anchoring and adjustment” in which people take mental shortcuts to answer problems based on their relative starting points. To demonstrate this theory, they gave one group five seconds estimate the product of these numbers:

8 x 7 x 6 x 5 x 4 x 3 x 2 x 1

Then they gave a second group five seconds to estimate the product of these numbers:

1 x 2 x 3 x 4 x 5 x 6 x 7 x 8

The correct answer is obviously the same, so you would expect similar estimates from the two groups. However, the first group gave a median answer of 2,250 while the second group gave a median answer of 512. The difference is the result of a higher “anchor” for the first group where the string of numbers with led with 8 instead of 1.

So what does anchoring and adjustment have to do with your financial life? Virtually anytime you make a purchase, this heuristic plays a role. It’s why the sticker price at car dealerships are so high—everyone knows that’s not what you pay, but it creates a mental anchor. So any price below that point is a mental “win” for you, even if it’s not a good deal.

Another example are signs at the grocery that say something like “Limit 12 Per Customer.” I assure you that the store is not worried about running out—they want to increase your anchor number from zero to twelve. Subconsciously, you want to take advantage of a deal, but in the process, you’ve allowed the grocery to decide how many cans of soup you buy.

There is no way to avoid bias in your purchasing. Some type of heuristic will come into play, but the important thing is to be aware of this process. If you know your brain is trying to take a mental shortcut, compensate by knowing ahead of time what you actually need.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

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